Why and How to Invest in Real Estate: The Basics

Investing is a vital approach to begin your journey to financial independence. Not everyone with a nine-to-five job can earn the type of salary that would make them rich. So, you may need to get an extra source of income, which is where real estate investments come in handy. Real estate investing is uncharted territory with great returns.

Smart real estate investments can be quite lucrative and increase your net worth. A survey indicated that real estate accounts for about 60 percent of the global mainstream assets, and adds considerably to the overall national, commercial, and individual wealth. You can reap huge rewards without necessarily buying properties. 

Investing in real estate properties can also add diversification to your portfolio. This can be quite easy, once you understand the basics, the risk involved, and the economics. You can make informed decisions regarding whether to invest in real estate or not, when and where would be most lucrative when you carry out your due diligence report. 

Investing in real estate could be quite simple, but it does not necessarily mean it’s an easy venture. Still not convinced? This article will provide you with basic knowledge about everything you need to know about how to invest in real estate.

A Broad Outline of Real Estate Investing?

What comes to mind when you think "real estate"? If you think of houses, lands, and other landed properties, then you’re not far off. Although these are vital components of real estate, real estate involves improvements of anything permanently fixed to the land. These improvements are known as real estate developments. This will not only cover the buildings and other structures on the land, but the fence, trees, roads, and other utilities affixed to the landed property.

Real estate can be generally considered as an asset that is capital intensive. This capital may, however, be obtained via mortgage leverage.

Real estate investing simply means the acquisition, sale, proprietorship, or lease of land or other permanently affixed buildings and structures on the land mainly to make money. Real estate investing involves several categories of investments with the aim of making profits such as owning residential, industrial, commercial properties, or parcels of lands, renting out these properties, or purchasing these properties in order to develop and resell them for a profit. Although, these categories of real estate have diverse lending conditions when applying for a mortgage.

• Residential real estate investments are the most common forms of real estate investments including condos, single-family homes or multi-family homes, as well as townhouses that can be rented out or resold for a profit.
• Industrial real estate investments are properties that cater to industrial operations including power plants, factories, and shipping or storage warehouses.
• Commercial real estates are properties used for commercial purposes. These include business offices, retail space such as restaurants, cafés, farmlands, and large apartment buildings or multi-family homes. Homes that are often more than four units are usually categorized as commercial real estate.
• Lands encompass undeveloped properties with no buildings or any structures affixed to them. Profits can be made from owning parcels of land by selling the lands or using them for agricultural purposes.

Who Should Invest in Real Estate?

Real estate investment is an appealing concept with vast potentials for making money. However, not everyone can venture into real estate. You need to have a strong financial foundation and an understanding of what real estate investment entails. The reason is that unlike most investment ventures, real estate investments require cautious calculations and constant tracking of your market. Before you begin purchasing your properties, ensure you consult a reliable real estate expert, and conduct a thorough real estate market analysis. If you must reap any benefits at all from any investments you must make smart real estate decisions.

You may need to ask yourself these magic questions: “Do I have the right skill(s) to invest in real estate? Are my resources enough for a real estate investment? Do I live in a favorable market or do I need to look outside my area for a more favorable option? And finally, Can I make necessary commitments that come with investments? 

Why Invest in Real Estate?

Now that you know what real estate investing involves, you’re probably still wondering what the potential benefits of investing in properties are. Although no investment method has been able to guarantee a sure profit or even the safety of your principal, real estate has proven to be the safest category of investment with huge returns of profits.

Most of us are aware of the benefits that come with investing in real estate. Most of these benefits outweigh the cost of purchasing properties, as you can realize a steady flow of income that will ensure your financial freedom in the long-run. Depending on the location of your property, you could be earning a substantial amount of income that would cover most of your expenses and still leave you with extra cash to with as you please.

Other benefits include:

• You enjoy the benefits of having a diversified portfolio.
• You enjoy long-term financial security.
• You enjoy tax benefits that accompany depreciation.
• You make decisions on your own.
• Real estate appreciates with time.
• Real estate outpaces the returns that come with conventional investments.
• You can build equity for your future and cash flow for your retirement.
• You generate wealth and it can be an alternative source of income.
• It’s easy to finance and you get leverage.
• Real estate investments help to lessen risks. 

The Five Basic Methods of Benefiting from Real Estate Investments

You can benefit from investing in properties through five basic methods such as tax benefits, leverage, interests, appreciation, control.

Tax benefits

What most people don’t consider are the tax benefits of investing in real estate. The government considers the profits from real estate as capital gains. As such, they are taxed lesser in comparison to employment income. Another plus side of investing in real estate is that the tax basis of your investment properties decreases over time since tax codes permit you to depreciate your real estate annually.

Leverage

Another advantage of investing in properties is that as an investor you get to leverage your capital several times over. This means you can use borrowed funds to invest in other properties that you would ordinarily not be able to buy and still get all the benefits from the ownership of the property. How cool is that!

Interests

Real estate investment companies and private equity firms are often the beneficiaries of this benefit. For instance, a bank can give out loans for real estate to an investor or a real estate developer to buy properties and then charge an interest depending on the amount borrowed and the duration of the loan, in order to bring in revenue.

Appreciation

Properties appreciate over time and convert into sizeable amounts of profits. When you make long-term investments in the real estate market, your properties will appreciate over the years. People can make money just by purchasing and holding the property for long periods of time.    

Control

Most people enjoy the increased control they have over their investments when they invest in real estate. Unlike most types of investments where you wait passively for your investments to increase, with real estate investment you can enjoy control over almost every variable involved. You decide when and how to improve your property, you decide how to generate more income, and you acquire the negotiating skills and knowledge needed to secure a good deal.

How to Invest in Real Estate?

There are different ways of investing in real estate depending on the amount of money you have, capital, your expected return, your time commitment, risks, and investment horizons. Some investments come with only income, while others come with both income and appreciation. You can decide to do a hands-on-investment, which would require more of your time and commitment. This way you practically bear the responsibility alone. Examples include house flipping or wholesaling, fixing and reselling properties, and renting out properties.

You can also decide to invest in a hands-off-way. This method allows just about everyone looking to invest in real estate to invest, whether you have a vast knowledge of real estate investment or not. Examples of this passive form of investment include investing in REITs, ETFs, Mutual Funds, Opportunity Funds, Crowdfunding, and private equity funds. This article explains the passive or hands-off method of real estate investing. 

Invest in REITs

Real Estate Investment Trusts (REITs) are real estate companies that function as a mutual fund. They pool the capitals made by investors to acquire real estate, either for resale or generating continuous income. They typically specialize in one or more classes of property such as retail spaces, hotels, business office buildings, and apartment complexes. REITs usually pay higher dividends, making them a good investment option. You can make small investments in REITs particularly when you don’t have upfront capital.

Invest in Real Estate Online Platforms

Real estate online investment platforms link real estate developers to investors who want to finance projects, either through debt or equity. They invest in property investment opportunities, which may be hard to locate or out of reach for an individual. Some online platforms provide access to merely the debt investments, some provide access to both the debt and equity investments, whereas others concentrate on certain locations, and some focus across different locations within the country. Examples include Fundrise, CrowdStreet, Housers, CasaBayt, Patch of Land, and Realty Mogul.

Mutual Funds

You can invest in real estate mutual funds just as you invest in REIT and ETF. Mutual funds are investment securities. They give you access to invest in several bonds and stock portfolios with a single transaction. This makes them the perfect choice for new investors. Unlike other types of investments, mutual fund companies usually invest in openly traded assets that yield great levels of liquidity.

The flip side is, unlike REIT that requires a minimum investment, with mutual funds you are expected to make an initial deposit of $500 to $5,000. This may be somewhat discouraging. However, some mutual fund companies will provide options for automatic monthly investments ranging from $50 to $100, and would waive off your initial minimum deposit if you agree to an automatic investment.

Exchange-Traded Fund (ETFs)

Exchange Traded Funds or ETFs, are collections of bonds or stocks in a particular fund. ETFs are perfect when you’re looking to diversify your investments. Ensure you carry out a careful market survey before selecting which ETF to invest with.

Private Equity Funds

A private equity fund is an alternative investment category, which allows investors to pool their resources together in a single fund to make investments into the private market, or companies that engage in acquisitions of public companies, leading to the delisting of public equity. They include capitals that are not listed on a public exchange. Private equity funds are mostly illiquid, and thus restricted to investors who have enough money to tie up huge amounts of money for prolonged periods.

Conclusion

Remember that you don’t need to have a staggering amount of money before you can invest in real estate properties. No matter how small your income is, you can always find an investment plan that will work for you. The trick is to cultivate a habit of investing your money and making it work for you. Start with a small amount of money you won’t miss, then sit back and watch your wealth growing.

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